Suppose there is a 50 percent chance that the advertising game depicted in the above payoff matrix will end next period.The collusive agreement {(Not Advertise, Not Advertise)} is A)sustainable since $175 $50.

Question

Suppose there is a 50 percent chance that the advertising game depicted in the above payoff matrix will end next period.The collusive agreement {(Not Advertise, Not Advertise)} is A)sustainable since $175 < $250. B)unsustainable since $175 < $25. C)sustainable since $20 > $50. D)unsustainable since $350 > $50.

Quizplus · Accepted Answer

The collusive agreement of (Not Advertise, Not Advertise) would result in both firms receiving a payoff of $175, which is less than what Firm A would receive if they were to deviate and advertise ($250). However, if there is a 50 percent chance that the advertising game will end next period, it may not be in Firm A's best interest to deviate from the collusive agreement and risk a lower payoff of $25 if Firm B chooses to advertise. Therefore, the collusive agreement is sustainable in this scenario.

Suppose There Is a 50 Percent Chance That the Advertising